The shares of Singapore-based Sea Ltd have continued their northward journey on the New York Stock Exchange (NYSE), despite the e-commerce and gaming giant reporting a widening of losses in the second quarter (Q2) of this year.
Sea Ltd’s shares closed at $318.61 apiece on Wednesday, following the group’s quarterly results announcement, up more than 3% from the previous close. The shares have surged by over 60% since January and the company currently commands a market capitalisation of around $16o billion on NYSE.
The strong retail investor interest in the stock comes despite the fact that Sea has not clocked an annual profit since it listed on NYSE in 2017. In fact, in Q2 2021 its net loss widened by 10% year-on-year, on the back of higher marketing and hiring spends.
However, investors have by and large ignored the losses and instead bet on the company’s strength as a dominant e-commerce and gaming player in the fast-growing Southeast Asia region.
Sea group’s revenues in Q2 2021 rose to $2.28 billion, up 158% from a year ago, beating estimates of $2.02 billion, according to S&P Global Market Intelligence.
Rising revenues apart, analysts also point to the company’s strengths across various business divisions.
E-commerce growth
Sea’s e-commerce platform Shopee booked revenues of $1.16 billion in Q2 this year, the highest among the group’s three segments, and more than 2.5 times the value in the same period last year.
Malaysia also became the second market to break even on an adjusted Earnings before Interest, Taxes, Depreciation, and Amortisation (EBITDA) basis after Taiwan.
Shopee’s ability to raise the commission rate of merchants in Latin America by 5-7 percentage points — it is now 12% to 18% for certain sellers — is on par with the rates incumbents charge in the region, and a sign that there is positive reception from sellers, wrote UBS’s Navin Killa, Marissa Putri, and Jerry Liu in a research note after the Q2 results.
Similarly, Shopee was able to increase commissions it charges merchants in Asia, JPMorgan’s analysts Ranjan Sharma, Vida Cornelius, and Alex Yao pointed out in their research note. For example, it increased commissions in Indonesia to between 0.75% and 2.5%, and in the Philippines to between 2% and 5%, from 2% earlier.
Sea’s spending on marketing increased significantly in Q2, up 139% year-on-year to more than $920 million. A large chunk of that spending — close to $650 million — went to boosting the e-commerce segment.
But DBS analyst Sachin Mittal in his research note wrote that Shopee’s investment in capturing market share instead of monetisation, could create “greater monetisation potential” overall since the ongoing COVID-19 pandemic presents opportunities to onboard merchants, who have been forced to migrate online.
In a post-results earnings call, Sea’s chief corporate officer Yanjun Wang said that greater spending on incentives was a “managed outcome” to take advantage of holidays, such as Ramadan, in the second quarter. Results have already started to show, she said, as monthly purchase frequency has risen to more than six times. In Indonesia, which accounts for 40% of Shopee’s orders, the monthly purchase frequency is over seven times.
Already, Sea’s ability to monetise from Shopee has improved, Mittal wrote. Its take rate — revenue as a share of gross merchandise value — rose from 7.3% in the first quarter of this year to 7.7% in Q2.
However, adjusted EBITDA loss per order came in at $0.41, more than the first quarter’s $0.38, meaning that unit economics was weaker, the JPMorgan’s analysts noted. Adjusted EBITDA also fell into the red for the first time since the first quarter of 2020.
Gaming, and fintech on the right track
DBS’s Mittal also wrote that Sea’s better-than-expected performance in the gaming segment — Garena is profitable and clocked $598 million in operating income in Q2 2021 — will rake in enough cash to help expand its e-commerce segment in Latin America and food delivery business in Southeast Asia.
Sea also revised its full-year guidance on Garena’s bookings. It now expects bookings to grow by 44.4% this year from 2020, instead of the 38.1% it had forecast previously. Bookings is an estimate of how much cash users spend by adding revenue and deferred revenue.
“We believe Sea’s ability to generate organic cash flows from its gaming business (which continues to grow) gives it a unique competitive advantage in being the leading internet company in Southeast Asia,” said Credit Suisse’s research analysts Varun Ahuja and Kylie Wan in their note.
Though Sea’s fintech segment recorded the least revenue — $89 million in the second quarter — it was 73% higher than in the first quarter.
“While SEA’s Q2 2021 results already indicate changing product mix away from payments, we believe online lending and financial product distribution will see acceleration over the next 12-18months. We believe this will be driven by the impending launch of the digital banks and financial product innovation,” JP Morgan’s note indicated.
Challenges
The analysts, however, pointed to several potential hurdles to Sea’s growth. For one, the company is playing in the immensely competitive e-commerce space. Some of Sea’s rivals, including Tokopedia, Bukalapak, and Lazada, are themselves tech giants in Southeast Asia.
Other possible drawbacks include a prolonged COVID-19 pandemic weighing on consumer sentiments and regulatory risks such as possible taxes on merchants’ sales.
Moreover, Garena has had only one self-produced gaming hit so far — Free Fire. A decline in its popularity would not augur well for the company. “Sea is exposed to revenue concentration risk, as the top five games account for [around] 80% of digital entertainment revenues. (And) Sea is still relatively new to game development and may not be able to repeat the success of Free Fire,” JPMorgan’s note stated. “If self-developed games revenues are replaced by licensed games, Sea’s gaming margins would be at risk, as Garena has to give developers 20-35% of gross billings on licensed games.”